China stimulus to add fuel to the commodity supercycle fire?

We have been writing about what we think is an upcoming commodities supercycle for over 2 years now. The following Bloomberg article highlights China’s plan to tap a $120 billion credit line to spur economic growth through infrastructure spending.

All of this infrastructure spending requires more commodities.

Read the full article here.

Below are our key takeaways:

• China has ordered state owned banks to set up US$120 billion in lines of credit for infrastructure projects as it leans on construction to stimulate the Chinese economy.
  
• China’s call comes after official data showed that economic activity contracted in April and unemployment rose sharply.

The article highlights the readiness of the Chinese government to lean on fiscal stimulus to spur economic growth in times of contracting GDP growth numbers. We think that these type measures are likely to become the norm with governments all around the world responding to any slow down with more fiscal stimulus by way of infrastructure spending.

Generally governments would try to respond to slowdowns in economic growth by cutting interest rates, with this tool exhausted after the COVID pandemic we think infrastructure spending will become the new policy of choice all around the world.

We think that this will result in an increased demand for commodities at a time where the supply side response just isn’t coming in to play. We think all of this should take commodity prices higher.